How to keep your store from going out of business

Category - News | Posted on hi April 7, 2015 Written by ETretail.comLeave a Comment

ETretail.com, April 7, 2015, Mumbai

When a retail store shuts down merely months after the grand opening, the failure isblamed on a host of external factors such as poor footfalls or economy being down orlocation issues etc etc.

These ‘reasons’, however, cannot be validated. Retail chains are well aware of opportunitiesand risks of opening a new store in a new location. They do a lot of homework and put theirmoney only in locations that have potential.

Yet, stores fail despite market potential.

Why? What signals the end of a store? How does the number of customers drop to alarminglevels forcing closure? What leads to ‘low demand’?

The answer is ‘inconsistent availability.’

Shoppers prefer to visit stores that stock all the items on their shopping lists. If a few ofthose are unavailable, they are put off. Deprived of the convenience of ‘one-stop-shop,’they avoid visiting shops that do not have all the materials and move to one that does,especially if it is close by. As they walk away, they take away their entire shopping lists, notjust the items that not available, but they also take away other shoppers! I mean figuratively, of course. Their poor opinion of the said shop could spread to those aroundthem and they too might steer clear of the said shop.

Thanks to this phenomenon, over a period, the store experiences exponential loss (notlinear) of footfalls and sales.

The direct impact of the loss of customers is seen on inventory turns. In the absence ofbuyers, the inventory sits on shelves locking up precious capital. Shortage of capital furtherexacerbates the unavailability – store managers do not get the funds to buy the fast movers.

Also, they are forced to display the slow movers on prime shelf space. This would soonrender the store dull and boring, and deter customers from walking in.

So, the first step towards popularity is ensuring 100% availability. Often, this is attemptedwith the stocking of high inventory. This again locks up working capital leading to shortageof capital to buy stocked out items. Other problems like obsolescence, need to discount toflush out slow-movers follow.

Managers are often caught in the vicious loop and can do little but watch the stores undertheir care hurtle toward closure.

The way out

Managers view the prospect of 100% availability with low inventory as a having-your-cake-and-eating-it-too kind of a situation. That situation, however, isn’t unattainable.

Companies often aim to improve profits without increasing operating expenses. This willadd to the bottom line. If a retail company is able to increase sales by 20% with a grosscontribution of 20%, it can easily take its profits from 3-4% to 8%. Twice the current profit,that is.

Now, here’s how managers can have and eat their cake.

The solution

A store can achieve 100% availability if its shelves are regularly replenished. It is suppliedonly what it has sold.

To avoid stockouts, the store has to start off with inventory enough to meet demand duringsupply lead time. The formula to arrive at this quantity is maximum sales/day x replenishment lead time which is the sum of ordering lead time and transportation leadtime.

If store managers are able to collect daily sales data and place orders daily, the orderinglead time can be brought down to one day. Transportation time is not more than one day,considering that supplying warehouses are usually located close to the store.

Replenishment lead time, therefore, can be 2-3 days.

The store can safely start with 5-6 days of inventory and be sure of 100% availability.

That’s a start.

As the days roll into months, sales trends tend to change. Some items may sell quicker thanothers. Store managers as well as those at the warehouse and the manufacturing plant haveto keep up. They have to adjust the replenishment lead time accordingly and ensure thatthe store never runs out of any SKUs.

As availability improves, inventory levels dip, forecasting becomes redundant (except fornew products), capital is released. The capital can be used to improve range which would inturn serve the cause of availability and increasing footfalls. Sales goes up, profitability goesup.

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